CME Working Group Update
Written by Jim Fryer | Hobson, MT
Our cattle industry is going through one of the most dramatic price declines in decades. Similar events are also occurring across many different commodities, from wheat to oil. Several years of record high prices building upon momentum from the previous decade have led to a surge in supplies. At the same time, macroeconomic conditions throughout the world face challenges we have yet to fully grasp. We know full well, in our industry, that it takes longer for our biological process to ramp production. This has left many reeling from overall deflation while the expansion of the cowherd has only just begun.
Lying in the middle of this malaise are the futures markets where a variety of firms anticipate forward prices for our commodity products. Price volatility is running higher than the last 30-40 years and many cattle buyers struggle with 5-10% price changes, both up and down, in short timeframes. Price bids in the country reflect the same uncertainty. This action incited the NCBA to expand their Cattle Marketing and International Trade Committee to identify problems and advocate changes with the CME’s live cattle futures contract. The NCBA accepted Montana Stockgrowers’ recommendation that I join the CME Working Group. It is an honor to be chosen to represent our industry in such a significant endeavor.
Our group assembled in early August with 26 members including Craig Uden, NCBA President-elect, as the chair. We divided into three subgroups: 1) Contract Specifications, 2) Price Discovery and 3) Price Volatility. Each subgroup conferenced several times to organize and prioritize issues within each component. I joined the Price Volatility subcommittee tasked with evaluating short-term price change and identifying pitfalls.
Following remote efforts and teleconferencing, our entire working group met in Washington D.C. during the first week of October. Our goal was to present our concerns and requests to the Commodity Futures Trading Commission (CFTC) and the U.S. House Committee on Agriculture. The CFTC is the self-regulating agency supervising the CME while the Committee on Agriculture oversees the CFTC. The CME also traveled to D.C. to present price action data and information that the NCBA requested earlier this year.
Intention is one major theme that my subcommittee and I carried to D.C. Of the approximate 50,000 semi loads of fat cattle that trade daily in Chicago, there are many more bids to buy and offers to sell (quotes). The intention of honoring that specific bid or offer at that precise price is unknown.
Often, the bid-offer will disappear in microseconds. We want a clear answer from the CME that each bid-offer has the intention to fulfill true price discovery. Lack of intention (spoofing) is an illegal practice used by malign entities to disrupt real prices. I agree the CME must effectively enforce current spoofing rules and increase the punishment for illegal actions.
The contract specifications group is working to balance quality grades of the futures contract with industry standards. Evolution in feeding practices and technology in general has slowly pushed beef production into more choice grade carcasses. This group will be working with the CME to increase the number of choice cattle per semi load while advocating for a dynamic contract that will further reflect industry changes in a more timely fashion.
Another major component of our economic condition is price discovery. This theme runs in every current of our beef and cattle industries. The subcommittee tasked with this topic is pushing for more transparency and frequency of negotiated cash trade. As more cattle go on formula and industry average base contracts, the number of cattle setting the price foundation is dwindling. Several key players throughout the Midwest will be listing their cattle on Superior Livestock’s new Fed Cattle Exchange. This venue allows sellers of fat cattle to interact real-time with packers bidding on showlists in a public domain.
Currently, the auction is held mid morning on Wednesday to avoid a last minute rush to price cattle late on Friday after the futures market is closed for the week. As participation increases, it is likely another auction will be held on Tuesday or Thursday. That threshold is within reach following this week’s record participation.
From our meeting in Washington D.C., it is clear that our industry is getting attention. The CFTC stated our comments reflect similar conversations with other industries and that we should continue pushing for resolve with the CME. It is also encouraging to see more fat cattle going on a transparent showlist that has active packer bids. This is perhaps the single greatest opportunity. Let’s ensure we are setting the best price possible for all our formula and base contracts. We must dedicate more volume to the price setting process. At the same time, we will keep pressure on the CME to ensure malignant participants cannot place orders with no intention of honoring. I will have more information on our progress in the coming months.
In response to the recent market volatility, MSGA nominated Jim Fryer of Hobson, MT to serve on the National Cattlemen’s Beef Association (NCBA) / Chicago Mercantile Exchange (CME) working group. This working group has been tasked with investigating inconsistencies in the cash cattle market and ensuring a level playing field for all market participants. Jim Fryer lives in Hobson, MT with his wife, Heather, and their three children. Jim has decades of experience working in cattle and beef cash markets. For five years he handled global trading for Cargill including direct interaction with major hedge funds and exchanges. He has years of risk management and futures trading experience which makes him a key asset to discovering the cause behind the market volatility. For any questions about the NCBA/CME working group, please contact the MSGA office.